NewsWire - January 20, 1999
Topic: Multinational Financial Management, Exchange Rates, Parity Relationships
Source: "Back to the Brink: Brazil's Devaluation Reignites Global Fears of Spreading Malaise," by Peter Fritsch and Michael M. Phillips, Wall Street
Journal, Thursday, January 14, 1999, page A1.
Synopsis of Articles:
The article provides a discussion of the current financial crisis in Brazil and its recent
decision to devalue its currency (the real was allowed to fall 8.3% against the U.S. dollar
last Wednesday). Supporters of the devaluation argue that it will avoid the high interest
rates and inflation rates that would come with continuing to support the real against the dollar.
Critics of the devaluation argue that it will lead to capital flight from Brazil and worsening
economic conditions. The article offers a good opportunity to use a current economic event
to illustrate many multinational finance concepts, including the determination of exchange
rates and their impact on the economy, and interest rate and purchasing power parity conditions.
The article helps to point out the increasing complexity and uncertainty resulting from an
interdependent global economy.
Questions:
1. How has the exchange rate for the Brazilian real been determined,
and how has it changed recently?
2. How is the change likely to impact interest rates and prices in Brazil?
3. How will devaluation affect Brazil's economy?
4. How is the devaluation of the real relevant to the U.S. stock market?
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